Net Neutrality, Startup Communities and Permissionless Innovation

If you have not noticed what is happening to Net Neutrality and the FCC’s vote on May 15th you really need to. Fred Wilson of USV has written an Open Letter to the FCC Chairman and most of the prominent Venture Firms have signed up. This is an important debate although it is being fought in the US, it impacts all the startup communities around the world. Europe has actually got it right and the way this was done was through legislation, the last mile is the main problem and by legislating that the last mile also be treated like all of the network, the consumer can choose any service provider irrespective of which provider she choose first, think of it like buying a mobile phone with no long term contract and if you don’t like the call dropping just switch the SIM card and get better service. The US has a big problem in this because of consolidation, there are relatively very few players like Comcast, Verizon, Fox Netw, CenturyLink etc and the choices in front of the consumer are quite limited. Here is a video that defines the problem and the challenges. This also opens up opportunities to small startup communities like Iceland to provide a stable ground to do permission-less innovation and disruption. This was the original idea that I wrote about a while back based on Brad Burnham’s blog post, that Iceland has an opportunity to be the “Internet Enterprise Zone”

Here is the open letter written by Fred and signed by most of the VC community:

We invest in entrepreneurs, investing our own funds and those of our investors (who are individuals, pension funds, endowments, and financial institutions). We often invest at the earliest stages, when companies include just a handful of founders with largely unproven ideas. But, without lawyers, large teams or major revenues, these small startups have had the opportunity to experiment, adapt, and grow, thanks to equal access to the global market. As a result, some of the startups we have invested in have managed to become among the most admired, successful, and influential companies in the world.

We have made our investment decisions based on the certainty of a level playing field and of assurances against discrimination and access fees from Internet access providers. Indeed, our investment decisions in Internet companies are dependent upon the certainty of an equal-opportunity marketplace.

Based on news reports and your own statements, we are worried that your proposed rules will not provide the necessary certainty that we need to make investment decisions and that these rules will stifle innovation in the Internet sector.

If established companies are able to pay for better access speeds or lower latency, the Internet will no longer be a level playing field. Start-ups with applications that are advantaged by speed (such as games, video, or payment systems) will be unlikely to overcome that deficit no matter how innovative their service. Entrepreneurs will need to raise money to buy fast lane services before they have proven that consumers want their product. Investors will extract more equity from entrepreneurs to compensate for the risk. Internet applications will not be able to afford to create a relationship with millions of consumers by making their service freely available and then build a business over time as they better understand the value consumers find in their service (which is what Facebook, Twitter, Tumblr, Pinterest, Reddit, Dropbox and virtually other consumer Internet service did to achieve scale).

Instead, creators will have to ask permission of an investor or corporate hierarchy before they can launch. Ideas will be vetted by committees and quirky passion projects will not get a chance. An individual in dorm room or a design studio will not be able to experiment out loud on the Internet. The result will be greater conformity, fewer surprises, and less innovation.

Further, investors like us will be wary of investing in anything that access providers might consider part of their future product plans for fear they will use the same technical infrastructure to advantage their own services or use network management as an excuse to disadvantage competitive offerings. Policing this will be almost impossible (even using a standard of “commercial reasonableness”) and access providers do not need to successfully disadvantage their competition; they just need to create a credible threat so that investors like us will be less inclined to back those companies.

We need simple, strong, enforceable rules against discrimination and access fees, not merely against blocking.

We encourage the Commission to consider all available jurisdictional tools at its disposal in ensuring a free and open Internet that rewards, not disadvantages, investment and entrepreneurship.